Total market volume fell off sharply ahead of the three-day holiday weekend, but the resilient broad market refused to give up any of its recent gains last Friday. The Nasdaq Composite added another 0.2% on to the previous day’s 1.0% gain and set its highest closing price since the March 7 peak. The S&P 500 similarly closed 0.1% higher, but the Dow Jones Industrial Average closed flat. As we often see ahead of holiday weekends, the broad market lacked volatility and momentum in Friday’s session. The S&P 500, for example, traded in a narrow intraday range of only 4 points, its tightest range day since February 14. The lazy action of the indices was not surprising considering that volume in the Nasdaq declined by 23%, while total volume in the NYSE came in 19% lighter than the previous day.
Looking at the daily charts of the major indices, the relative strength and bullish divergence of the Nasdaq Composite quickly becomes apparent. The index has closed higher in ten of the last eleven days, with more than half of those sessions being institutional “accumulation days” (higher closing price and on higher volume). One could reasonably argue that the Nasdaq is short-term “overbought” on a technical level, but remember that stocks and indices can remain that way for a long time. It is unwise and often costly to predict the top of a sharply uptrending index, but we can look at major areas of price resistance in order to determine where an index is likely to experience at least a short-term price correction. The red horizontal line on the weekly chart below illustrates the Nasdaq’s next area of major price resistance, which was formed in the first quarter of 2005. The blue horizontal line shows the major support area if the index corrects in the coming week:
Overhead resistance levels on the S&P 500 are not as clearly defined, as there is resistance from here all the way up to the March high. However, minor support has now formed at the 1,191 area, as illustrated by the blue horizontal line on the chart of the S&P 500 below:
The Dow Jones Industrial Average remains the weakest of the three major indices. While the Nasdaq has been steadily climbing higher for the past week, the Dow has been trading sideways. Unlike both the Nasdaq and the S&P, the Dow remains stuck below resistance of its prior highs from March and April. The red horizontal line on the chart below illustrates resistance of the prior high. Support is at the 200-day moving average (the teal colored line), which also converges with support of the prior highs from early May:
Notice that we used a weekly chart to discuss the Nasdaq Composite, but used daily charts to annotate support and resistance levels on the S&P and Dow. This is because the Nasdaq has rallied so fast that we must look much further back to see the major areas of resistance. Conversely, the Dow has yet to even rally above its April high. The S&P has barely done so.
As mentioned earlier, we are not interested in calling a top of the recent rally. But when the broad market eventually corrects from its May gains, it is helpful to know which indices are likely to hold up the best and which ones will be the weakest. For example, when an individual stock fails to rally with an overall strong market, that stock is usually the first to fall when the market shows the slightest weakness. Conversely, a stock that does not go lower with a down day in the broad market is usually the first stock to blast off to new highs on the first day of market strength. This same concept of relative strength and weakness applies to individual indices and ETFs as well. Based on a simple comparison of the daily charts, it is easy to see the Nasdaq is the strongest of the major indices and the Dow is the weakest. On days when the broad market is weak, expect the Dow to show the biggest percentage loss. On uptrending days, of which there have been many, odds are good the Nasdaq will gain the most. There have not yet been any technical signs of a short-term market correction, but being long only the stocks and ETFs with relative strength will save you money when the correction eventually comes. The tech-related stocks and ETFs, as well as the Biotechs, continue to show the most relative strength. Utilities and Basic Materials show the most relative weakness.
There are no new plays for today, although we continue to stalk both SMH and BBH for ideal long entry points on a correction. We also remain short UTH from our original May 13 entry. As always, we will send an intraday e-mail alert to Wagner Daily subscribers if/when we enter any new ETF positions intraday.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.
UTH short (from May 13) –
shorted 103.64, 10 cents over the 20-minute high or fixed price of 105.60 (whichever is higher), target 99.10, unrealized points = (1.63), unrealized P/L = ($163)
We are keeping the same max. stop price in UTH, but remember the MTG Gap Rules in the event of a gap up in UTH.
Edited by Deron Wagner,
MTG Founder and